Governments guranteeing banks – 100% uncertainty

Uncertainty - effecting the economy

Uncertainty - effecting the economy

DON’T PANIC!

However, when there is more to fear then fear itself and uncertainty that is easy to say. When governments start sending mixed signals the problem of confidence, let alone knowing what is going on with full information, makes rational decision making problematic – adding to the financial crisis.

Ireland guaranteed deposits 100%. This infuriated other member states of the EU, because it put pressure on them to do like wise – exacerbated by capital going to Irish Banks. Yesterday the German Chancellor appeared to state that the government would back savings also by 100%. That is significant – Germany has more savings then any other country. The British Government could not get specifics on the German policy.

If the UK followed suit that would mean guaranteeing funds in excess of a trillion pounds – money which the government does not have. This weekend like last saw bankers loosing time off as a scramble to sure up liquidity and governments buying stakes in banks:

  • The German government was forced to salvage a 50bn euro ($69bn; £39bn) rescue package for Hypo Real Estate
  • Denmark and Sweden both increased the amount of protection depositors in their banks receive
  • Iceland said its banks had agreed to sell some of their overseas assets and was trying to persuade the trade union pension funds to repatriate some of their funds too
  • The individual actions came after EU leaders decided at a summit on Saturday not to attempt a pan-European solution
  • France’s BNP Paribas said it would take a 75% stake in Fortis. [BBC News]

The worry is domino dancing, with a collapse not just spreading in the banking system in one state but in others as well. In an interdependent world, and single market Europe seems unprepared for quickly speculation is impacting on confidence as they chase after one crisis after another. Rather then providing confidence and stability, this is reacting to events as they unfold.

Before the financial crisis an economic downturn was happening. The situation with banks is going to confound the problem. As well as people and businesses finding it more difficult and costly to get finance there is the added problem. Redundancies are going up and the costs of living are rising. It does matter to us ordinary people on Main Street because what was already a difficult situation is being made worse. There will be less tax payer’s money for public investment – borrowing will be more expensive for the government in these times – and for the type of spending that gets an economy through downturns when the private sector starts delaying investment and scales down production.

As an economist it can be difficult to not sound excited at what is happening. Suddenly everyone is concerned about the economy and what is going on, and what sort of regulation should be in place.When times are good people take it for granted and any muttering of lack of oversight or weaknesses are shouted down as regulation that would strangle the goose that lays the golden egg. The irony as always is such public and government concern and scrutiny of what is going on happens too late when the horse has already bolted.

On that panicked horse are in for a bumpy ride.

Stock markets are once again down suggesting it will take more to calm the beast:

MARKET DATA – 11:36 UK

FTSE 100
4712.02down
-268.23 -5.39%
Dax
5480.26down
-316.77 -5.46%
Cac 40
3845.83down
-234.92 -5.76%
Dow Jones
10325.38down
-157.47 -1.50%
Nasdaq
1947.39down
-29.33 -1.48%
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